Australia’s business confidence report for September was released by the National Australia Bank yesterday, and it was yet another doozy.
Business conditions remained near the highest level since before the global financial crisis (GFC) while confidence also edged back above its long-run average, recovering part of the fall recorded in August.
Great news, right?
Well, partially, says Andrew Hanlan, senior economist at Westpac.
While there are undoubtedly strong aspects to the report — the construction sector is flying and the employment subindex continues to point to strong hiring levels in the months ahead — Hanlan says that the strength reported in the headline business conditions index probably overstates the true strength of the Australian economy at present, continuing the pattern seen since the end of the GFC.
“The elevated level of the business conditions index is overstating actual conditions across the broader economy, as it has tended to do since the GFC,” he says. “In part this bias is due to the exiting of firms from some sectors, such as the auto industry.”
Essentially, with many firms in industries that were previously struggling now no longer around, it’s acted to boost the headline conditions index in the NAB survey, at least according to Hanlan.
The chart below from Hanlan puts what he’s referring to into visual form.
While the conditions in the NAB survey has continued to go from strength to strength, the hard economic indicators such as household and domestic demand have underperformed by some margin.
In a nutshell, the NAB survey, a soft data point reliant upon perceptions, has overstated what has actually been happening on the ground.
Indeed, adding weight to this view, as the conditions in the NAB survey has improved, real GDP has grown by just 1.8% in the year to June, the equal-slowest pace since the GFC.
While that suggests investors should show a degree of caution towards the NAB survey, it doesn’t mean that it should be dismissed either.
As Halan freely admits, economic conditions have improved this year following a slowdown in 2016 due in part to the Federal election. He says that firmer economic activity levels abroad have assisted the recovery in the domestic economy.
“Domestically there has been a turnaround in the construction sector, reflecting a diminished drag from the mining investment wind-down, a rebound in commercial building, an upswing in public investment, and home building activity remaining elevated,” he says.